Resource allocation the market
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RESOURCE ALLOCATION & “THE MARKET”. Demand, supply and the market Sources of “failure” in the market for health care The “insurance” system of funding health care Resource allocation in the absence of the “free” market - for discussion. DEMAND, SUPPLY AND THE MARKET.

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RESOURCE ALLOCATION & “THE MARKET”

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Resource allocation the market

RESOURCE ALLOCATION & “THE MARKET”

  • Demand, supply and the market

  • Sources of “failure” in the market for health care

  • The “insurance” system of funding health care

  • Resource allocation in the absence of the “free” market - for discussion


Demand supply and the market

DEMAND, SUPPLY AND THE MARKET

  • 1.Concept of Demand (“buyers”)- demand curve

    - influences on demand

  • 2.Concept of Supply (“sellers”)

    - supply curve

    - influences on supply

  • 3.Concept of the Market (“exchange”)

    - interaction of d+s

    - equilibrium (through price mechanism)


Demand

DEMAND

  • Consumers purchase those commodities which, subject to their income constraint, maximise their utility

  • “Demand” =willingness and ability to pay for a commodity at each and every price, over a given period of time, subject to all else being constant (ceterus paribus)


Resource allocation the market

DEMAND CURVE

Price

$

2

1.50

D=MB

No. Mars Bars

0

2

4


Determinants of demand

DETERMINANTS OF DEMAND

  • (Full ) price of the commodity

  • Prices of other commodities - compliments

    - substitutes

  • Consumer income/wealth

  • Consumer “tastes” (need?)


Resource allocation the market

INCREASE IN DEMAND

A  B caused by fall in price

A  C caused by increase in income

Price

$

A

C

2

B

1.50

D1

D

No. Mars Bars

0

2

4


Elasticity of demand

“ELASTICITY” OF DEMAND

  • Price elasticity = % change in quantity demanded

    % change in price

  • Shows responsiveness of demand to price

  • If : PE< 1 = inelastic

    PE> 1 = elastic

    PE = 1 = unitary elasticity

  • Main determinant = availability of substitutes


Resource allocation the market

PRICE ELASTICITY ILLUSTRATED

P

po

P1

Dpe

Dpi

Q

Qo`

Qi

Qe


Supply

SUPPLY

  • Firms produce those commodities which, subject to capacity, maximise their profit.

  • “Supply” = willingness and ability to sell a commodity at each and every price, over a given period of time, subject to all else being constant (ceterus paribus)


Resource allocation the market

SUPPLY CURVE

Price

$

S=MC

2

1.50

No. Mars Bars

0

2

4


Determinants of supply

DETERMINANTS OF SUPPLY

  • Price of the commodity

  • Prices of factors of production (cost)

  • State of technology

  • Other “goals” of firm


Resource allocation the market

INCREASE IN SUPPLY

A  B caused by increase in price

A  C caused by improved technology

Price

$

S

S1

B

2

A

1.50

C

No. Mars Bars

0

2

4


Elasticity of supply

ELASTICITY OF SUPPLY

  • Supply elasticity = % change in quantity supplied

    % change in price

  • Shows responsiveness of supply to price

  • If: SE < 1 = inelastic

    SE > 1 = elastic

    SE = 1 = unitary elasticity

  • Main determinant = flexibility in production


Supply elasticity illustrated

SUPPLY ELASTICITY ILLUSTRATED

Si

P

Se

P1

Po

Q

Qo`

Qi

Qe


Resource allocation the market

MARKET EQUILIBRIUM

Price

$

S=MC

2

D=MB

No. Mars Bars

0

2


Resource allocation the market

EXCESS SUPPLY

Price

$

S

A

B

3

E

2

D

No. Mars Bars

0

1

2

3


Resource allocation the market

EXCESS DEMAND

Price

$

S

E

2

A

B

1

D

No. Mars Bars

0

1

2

3


Resource allocation the market

NECCESSARY CONDITIONS FOR COMPETITIVE MARKET

  • No barriers to entry or exit (large number of independent buyers and sellers)

  • Consumer bears costs and receives benefit

  • Consumer has perfect information on cost and benefits


Resource allocation the market

WHY HEALTHCARE MARKETS “FAIL”

1.Uncertainty

2.Imperfect information and knowledge imbalance

3.Monopoly

4.Externalities

5.(Equity)


Resource allocation the market

INFORMATION ASYMMETRY

  • Lack information on cost, effectiveness, benefits etc.

  • Not physically/mentally able to make choice.

  • Leads to “agency relationship”.

  • Potential for “supplier-induced demand”.


Implication of sid

IMPLICATION OF SID

P

S

D2

D1

D

Q


Resource allocation the market

MONOPOLY

MONOPOLY = one producer who determines price and quantity

OLIGOPOLY =few producers who collude to set price. Engage in non -price competition


Resource allocation the market

EXTERNALITIES

Positive eg. Vaccination

Negative e.g.Antibiotic Resistance


Resource allocation the market

POSITIVE EXTERNALITY

Price

$

S=MC

4

2

MSB

1

D=MPB

Quantity

0

2

4


Equity

EQUITY

  • The competitive market will yield a distribution of commodities which is efficient.

  • “Inequity” of distribution is NOT a “failure” of the market - it is not “designed” to achieve this.

  • Equity is additional/alternative objective or a constraint


Resource allocation the market

THE “INSURANCE” MARKET

Is a means by which a third party will pay for care out of a central fund that individuals have paid into; either by premium or taxation.

Is the “market” solution to uncertainty concerning the timing and magnitude of expenditure.


Resource allocation the market

DEMAND FOR INSURANCE

Degree of risk aversion

Probability of requiring treatment

Cost of treatment

Premium “loading”

Income


Resource allocation the market

SOCIAL REASONS FOR “INSURANCE”

1.Systematic transfer from low to high risk, young to old.

2.Systematic transfer of income from rich to poor.


Resource allocation the market

ADVERSE SELECTION

Insurance may cover more high risk than low risk individuals. If too many high risk cases are covered, there will be excessive payouts, the insurance company will lose money, premiums will have to rise further, and the insurance company will eventually close.


Resource allocation the market

IMPORTANCE OF ADVERSE SELECTION IN “POOLING” HEALTH RISK

1.Variation in individual cost extremely wide.

2.Significant proportion of variance in individual cost is predictable.

3.High cost of insurers acquiring knowledge.


Resource allocation the market

“SOLUTION” TO ADVERSE SELECTION

  • experience rating

  • exclusions and benefit ceilings

  • subsidisation of those “in need”

  • publicly financed health care systems


Resource allocation the market

MORAL HAZARD

  • Once insured against “X”, “X” more likely to occur.

  • Full insurance means money cost facing consumer = zero.

  • Leads to “excess” demand - benefits from resources used for providing health care less that the benefits foregone from an alternative use.


Resource allocation the market

MORAL HAZARD

$ per unit of HC

D

Welfare loss

Po

MC

D

Quantity of HC

0

Qo

Q1


Resource allocation the market

“SOLUTION” TO MORAL HAZARD

  • use of co-payments or user charges

  • incentives to demand care from selected low-cost providers (PPOs)

  • combining insurer with provider (HMOs)

  • use of primary care as “gateway” to services

  • non-price rationing (waiting lists)


Resource allocation the market

CO- PAYMENTS

$ per unit of HC

D

Welfare loss

Po

MC

P2

D

Quantity of HC

0

Qo

Q2

Q1


Resource allocation the market

PUBLIC INTERVENTION

Subsidisation and/or regulation of private insurers.

Selective subsidies or provision of free services.

Public provision and/or social insurance coverage.


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